India’s Oil Strategy Hampered by Low Inventories and Refinery Constraints

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Hello and welcome to The Core Report's weekend edition. As we speak, India's state minister is in the United States going through another round of negotiations. One of the things he said is that he expects a high element of U.S. involvement in India's energy security. Now, that could mean many things, but that's the latest on the discussions that are going on. The background, of course, is that the United States has imposed a 50 percent tariff on India's imports into the United States. Twenty-five percent of that is for India buying Russian oil, which it also processes and exports to Europe, amongst other places.

So that's the background to it. But the more important question, or the larger question in some cases, is really what is happening in the oil market right now globally, and what can we take away from the demand and supply trends that we are seeing right now, which will help us understand and also maybe try and project what could happen in future. Now, to do all of this, I'm joined by Dr. Anas F. Al-Hajji. He's a world-renowned energy market expert, researcher, author, and speaker with more than 900 papers, articles, and columns to his credit. He's currently also managing partner at Energy Outlook Advisors, LNC, and before that he was chief economist at NGP, Energy Capital Management.

He's also contributing editor for World Oil and moderator of the oil industry's oldest virtual forum, Oil, Gas, and Energy Law, or OGEL. Dr. Al-Hajji holds an MA in economics and a PhD in economics from the University of Oklahoma with a specialisation in energy economics and policy. Dr. Al-Hajji, thank you so much for joining me. So let me start off by asking you, what are you seeing from your vantage point in Dallas as you look around the global oil market and the way crude is flowing?

We have to look at various factors here because we have the trade wars, as you know, and the tariffs that are slowing the global economy and slowing even the U.S. economic growth, and that affects the oil demand globally. So we are not seeing a very strong oil demand as a result of that. But speaking of this, today BP, the British petroleum company, announced that they don't expect a peak in oil demand until at least 2030.

This is a very important development because they announced in 2019 that oil demand has peaked then, and then they delayed it a couple of years, and now we are in 2025. Since then until now, global oil demand increased by 5 million barrels a day, and now they are delaying that peak until 2030. The reason why I mention this, aside from the fact it is today's news, there is a lot of misinformation and many wrong predictions in the markets for various reasons because of various agendas.

So we've seen the IEA, for example, the International Energy Agency, talking about a very limited growth in oil demand this year, about 700,000 barrels a day, the same for next year. And the IEA is talking about the largest surplus in the oil market ever next year, which is very strange because we don't have a recession, we don't have lockdowns, we don't have any problems. Oil demand is still growing, although at a lower rate.

But to talk about this massive surplus that never existed before is a complete nonsense. And if you look at OPEC forecast, OPEC forecast is double the growth of the IEA. And the question for anyone here is, okay, whom are you going to believe in this market?

Well, we know that everyone has an agenda. But when you look at the agenda of the IEA and you look at its historical record, you find out that almost everything they say is wrong, yet the media coerce them and the media keep talking about them and they ignore everyone else. For example, in November 2022, the IEA admitted that it's been estimating global oil demand at way lower than reality.

So the actual numbers are way higher than the IEA estimates. But here is the catch, since 2007. So for 15 years in a row, they've been underestimating the global oil demand.

And moving forward, so this was in November 2022, last May, let me back up here a little bit. So when they said this in 2022, they said that the revision is between 2007 and 2021. Last May, the IEA admitted that they underestimated the global oil demand in 2022, 2023, and 2024.

By how much? 350 million barrels. So now they've been wrong for 18 years.

And then last month in August, they admitted that they underestimated Mexico's oil demand by 100,000 barrels a day. Since when? Since 2020.

So with this record of mistake after mistake after mistake after mistake for 18 years, who is going to believe the IEA? But this is really not the main issue. The main issue here is people look at the historical data published by the IEA as real historical data.

So analysts at major banks, major investment banks and others, when they do their forecast, of course, they have a data set. And where did that data set come from? From the IEA.

But the IEA has been wrong for 18 years, and therefore all the banks are wrong. And we call that circular information, and we have to be careful with that. So with this background, now we go back and look at the market now, all the confusion we have in the market is coming from bad data, bad forecasts, especially from the IEA and the banks, because they're dependent on false data.

On the other side, we have a serious problem with President Trump policies, because you cannot, as an investor, as a trader, even an oil company or anything else, you cannot make any plans when the President of the United States has a different policy every single day. And in many cases, these are contradictory policies, and that's another source of volatility and problems in the market. As a result of this, it is very hard to kind of make forecasts in this atmosphere.

But based on what we see so far, that whatever you see in the market today is going to continue with us with some seasonal declines in prices and build in inventories.

Right. And prices have been somewhat steady in the last few weeks. But let me come to Russian oil now.

So right now, the U.S. wants to put secondary tariffs on countries like India, or rather only India at this point, for buying Russian oil. Now, what is the dynamic that you're seeing there? I'm not talking about the trade dynamic between India and the U.S., because that's a different story. But in terms of Russian oil and where it could potentially go, and if India were to not buy, what are the other options and what would happen in general to the oil market?

The idea in general that if oil revenues decline, that will end the war. The idea itself is wrong. We are not talking about a democratic country where people vote people out in Russia.

We are not talking about that at all. So the idea that if they reduce revenues, then Russia will stop the war, well, Russia went through many wars in the past, even the collapse in oil prices in the mid-'80s and others, and even after the collapse of the Soviet Union, we've seen several declines in oil revenues as a result of collapse in the market. Nothing happened.

So the idea itself is wrong. But let's back up here a little bit and talk about some details here. When the Trump administration imposed this 25% or the additional 25% tariff on India because India supposedly, based on what some people in the administration said, that it's supporting the war or Putin's war, first of all, the last month, the EU, 12% of EU natural gas imports in the form of natural gas via pipelines or LNG, 12% came in from Russia, and no one accused them of supporting the war in Russia. In fact, this year, US imports, again, we are talking about the United States of America, US imports from Russia increased over the last year, and no one accused the Trump administration of supporting the war. But what is more is Turkey imports massive amount of natural gas, petroleum products, and crude from Russia.

No one accused Turkey of supporting the war, and the fact is Turkey exports more petroleum products to Europe out of Russian oil than India, and no one accused them of supporting the war. China imports massive amount of natural gas and oil from Russia. No one accused China of that.

So it is very hard to believe that the tariff is really about importing Russian oil. I think there is more to the story than that, and there are several explanations or what are the alternatives, and if you look at Trump conditions on India, India right now, based on the population, is the largest market in the world, and everyone wants access to that market. So is it about that?

Well, that's a better explanation than the Russian oil imports. On the other side, the EU been trying or claiming to reduce its dependence on energy imports from Russia. The war been raging since February 2022, and they still import energy from Russia until today, and now they are saying, oh, we will ban LNG imports by 2027.

Morally, this is not acceptable because you are looking after yourself in this case while you are claiming you are supporting Ukraine, but the irony here is if you look at that decision that's been made by the EU, it's a conditional decision, and the condition basically is they will agree to it and they will apply it as long as it does not affect the companies that have long contracts with Russia. What that means is those companies cannot cut the contracts because there will be penalties and there will be arbitration.

And France, basically, in particular, put this condition that if the EU will guarantee that there will be no penalties and arbitration, then they will agree to it. And the EU cannot guarantee that because if you look at the contracts, the arbitration is in Moscow, it's not anywhere else. And therefore, they cannot even stop LNG imports from Russia by 2027.

The last point related to this is Zelensky said something last week that is extremely important, that the president of Ukraine, if you look at the last, since the beginning of 2024, Ukraine started using drones to hit Russian refineries, but they did not hit any crude oil facilities or any crude oil export facilities. And the reason why, because the Biden administration warned them, told them not to hit it. And the reason why, because the Biden administration was running for re-election and they don't want higher oil prices.

Most of the refineries in Russia are for domestic use, so that's not going to affect the global market much. Then Trump came to office with the same idea, and they already warned Zelensky not to hit any crude export facilities for fear of higher oil prices. Now we are coming into the fourth quarter where we might end up with lower demand, lower prices, and all of a sudden we've seen Ukraine for the first time hitting crude export facilities.

So they've done it three times so far in the last two weeks. And it is very clear that they've done it with a green light from the administration, simply because of lower prices. So what we think happened in the last couple of days, as you know, prices went up and they are above 69 for Brent, that Putin realised that lower prices are enabling the Ukrainians basically to hit those facilities with a green light from Trump.

So the thinking now is, well, we need to raise prices so Trump can go back to the red light instead of the green light. And how to do that? All of a sudden last night we've seen problems with CPC terminal exports, which export the Kazakhstan oil.

Kazakhstan is a major oil producer, but all their exports go through Russia, which is the CPC terminal. And the CPC terminal was hit or under threat. Ukraine has no interest in hitting Kazakhstan.

It has no problems with Kazakhstan. So who is hitting that? It is very clear from this that the Putin administration thinks that if we raise prices, then the Ukrainians will stop hitting the crude export facilities.

And that's what we've seen in the last two days.

I'm going to come back to Russian oil in a moment. But for those who only peripherally follow what's happening in the oil market, tell us about the basket of suppliers and buyers today. So for example, let's say the major suppliers or sellers, of course, are the OPEC countries or the OPEC plus countries.

And I mean, that includes apart from the Middle East and Russia, Saudi Arabia includes producers in South America and the US, of course. So who are the major producer suppliers today? And who are the major buyers?

I mean, of course, we know it's China and India. And what could change potentially if some of these things, some of these geopolitical moves pan out, including, let's say, somehow managing to control or suppress Russia from supplying more crude?

So the largest oil producer in the world is the United States of America. So the U.S. is the largest oil producer. And they are among the largest exporters in the world.

There is a very important point here related to India when we talk about the United States and India. India cannot import much from the United States. They can add probably one tanker a month or two tankers a month.

And that's it to replace Russian oil. And the reason why, because the complexity of the Indian refineries, basically, is geared toward medium sour and heavy sour crude, while most of U.S. exports are light sweet because U.S. shale produces light sweet crude. So here we have a technical issue.

It's the crude quality that determines this. So if Trump talks to Prime Minister Modi and said, you have to buy more from us, it's not up to Prime Minister Modi because it's a technical issue. We cannot get your oil simply because it's light sweet.

And our refineries, basically, are geared more toward medium sour. So that's an issue. However, historically, the primary suppliers to India, in particular, were the Gulf states and Iraq.

So you are talking about Saudi Arabia, you are talking about UAE and Oman, and simply because of the proximity to the Indian ports. We've seen at certain times, we've seen some diversity where India imported some from West Africa and Brazil, and some from Mexico or Latin or South American countries. But when Russian crude was embargoed by the Europeans and the G7, Russia has to find other markets and they have to sell at discount.

So India started importing the Russian crude at discount, and that Russian crude has to come at the expense of someone else. Of course, we have a growth in demand. So the Russian crude basically kind of met the growth in demand and replaced some of the imports from other countries.

Logically speaking, and that's confirmed by the data, you are going to replace the most expensive crude. And the most expensive crude coming to India is mostly because of the distance. So if you look at the replacement, India first replaced the South American crude, then the US crude, then West African crude, just based on the distance.

And now if we have any problems in Russia, then we go backwards. So you will see the first replacement for Russian crude is going to come from West Africa, and then the United States and then Latin America. So the issue here for India is, what is the replacement for Russian crude if we have a crisis in Russia?

Of course, we do have large spare capacity in the Gulf. And they are the countries basically can provide those additions as a replacement. The question is, will they do it?

And how much they are going to increase production to compensate? This is, no one can answer that at this stage. But what we've seen historically is we have the major producers are the OPEC members, the OPEC Plus members, United States, and Norway.

Basically, most of the exports of Norway goes to Europe. And we've seen Brazil, Guyana exporting large quantities to Asia and Europe. So those are the major suppliers.

When it comes to consumption and import, this is kind of a very interesting kind of thing to study. The largest importer in the world is China. But China now is changing its policy.

It's focussing its strategy on reducing seaborne energy imports. This is a strategic decision, has nothing to do with markets. And the reduction in seaborne imports require them to do several things.

One of them is to build massive inventories. And at the same time, increase imports from land, which means that pipelines from Russia that will bring natural gas and more coal imports from Mongolia. Now, on the India part, India is a large importer and might become the second largest importer in the coming years until China basically kind of lose that position.

But the idea here is, if you look at the largest importers, we have a new phenomenon in the market that we've never seen before. This started in 2016, so it's been there about 10 years. For China to be a big or a large importer of oil, China played a very important role as a very powerful buyer in the market.

I don't want to get technical on this one here, but the oil market never being competitive. Never being competitive. So any analysis of the market based on competitive ideas are wrong.

The market is some sort, and there are no cartels, by the way. There is some sort of oligopoly, that's an economic term, in the market. So we have, when you talk about oligopoly, you are talking about a few large sellers or a few large exporters.

But China changed that game since 2016 by being a very influential buyer. And that changed the market from oligopoly to something we call oligopsony. And that oligopsony basically prevents oil prices from going up substantially.

So in a sense, it's beneficial to consumers on several sides. But what that does is China will buy low, store the oil, and when oil prices go up, start dumping oil from storage on the market. This is a new behaviour in the market, and it became extremely influential, as influential as the OPEC members or OPEC Plus members in the market.

India cannot play that role. And I've been talking about this for several years now. India's problem right now when it comes to oil market is its inventories are very low.

And India needs to play the Chinese game. They need to enlarge those inventories to kind of be more energy secured on one side and not to be affected by this sudden increase in prices because of various political issues around the world. So the question for India right now, it rests on two issues here.

The first one is the Russian imports. The second one is inventories. India's inventories are about 100 million.

This is for the size of the economy of India. This is very low. And they need to go to at least 350 or 400 million.

Right, and there are investments that have been outlined or announced for building more strategic reserves. So I don't know if that number is the comfortable number, but I can sense that the inventory buildup is definitely happening. But let me, I had a question on the refinery.

So my understanding so far was that most Indian refineries are able to process both light sweet and medium sour simultaneously, or maybe not all refineries, but many of them. But you're saying that that's not enough.

Well, for the Indian refineries, for the capacity and everything else, they are fine. There is no problem. And India exports refined products to the rest of the world.

And so there is no problem with that at all. The issue for the Indian refiners right now is they have to juggle kind of the crude quality around the world based on all the changes that we are seeing. We've seen changes when the Europeans imposed the sanctions on Russia.

We've seen the Russian oil coming through the Mediterranean and the Red Sea to India. Now if the Ukraine war stops and the sanctions are reduced or lifted, then some of that Russian oil will go to Europe again. So what would India do?

So we have this game of musical chairs they have to play, and which means that they have to stay on their toes all the time to make sure that they are still making money and they don't lose money, or they are not going to experience any shortages out of those games. Luckily for now, we do have enough spare capacity in the Gulf. But what if that spare capacity declines substantially in the future?

How that musical chairs game is going to be played. The other issue that might pose a problem is that people are talking about electric vehicles and the impact of electric vehicles on oil demand. And those who are supporting electric vehicles, they think that oil demand is going to decrease.

Of course, I don't believe it at all. But they believe that oil demand is going to decrease, which means that the demand for gasoline is going to decline. And if that happens, then refineries will be forced to change the configuration of those refineries.

So this is another threat that those refineries have to look at. Although, again, I don't believe it's going to happen, but a lot of people are raising that question. So the India refineries are facing several issues, including the fact that if you look at the Middle East right now, we are seeing a major competition.

So we've seen new refineries in Kuwait, and UAE, and Oman, and Saudi Arabia. And these are mega refineries. What that means is that the India refineries have to be extremely competitive, again, on their toes 24-7, to make sure that they are competitive with everyone else.

Right, and let me come back to the supply side for a moment. You said that, I mean, we started off by talking about President Trump's intention, and one of them being to bring down oil prices. So is all of this adding up to that?

And if not, then what else, or how can we look at the near future? Second is, does Canadian crude figure anywhere in this equation?

Yes, big time. In fact, about 60% of US oil imports come from Canada. And Canada last year started a new pipeline for the first time, Canada exports oil on its own.

Because historically, all the Canadian oil goes to the United States. Some of it is exported, but exported through US ports. Now, the Trans Mountain Pipeline goes to Western Canada, and it is exporting oil as we speak.

And it plays a role in several ways, because the Canadian oil sand, where the oil come from, is a completely different game from anyone else. And the reason why, because if you look at shale in the United States, shale wells come with a very large decline rate. They lose at least 40% of their production after the first year.

While in the oil sand, they have the lowest decline rate in the world. And the reason why, because think about it like it's almost like a whole mountain or a hill or something, and it's all oil, and all rocks that has oil. So it's a completely different process.

So it comes with a lot of oil with little decline relative to the shale. So it has a special importance in this case. And then we do have two types of oil coming out of that.

We have the synthetic oil, which is a very clean, high quality oil. And then we have the heavy crude. And the heavy crude is needed for several reasons, of course, because the refineries, especially in the US, are geared toward that.

But at the same time, we've seen the importance of it with problems in Venezuela and the sanctions on Venezuela, because Venezuela produces almost a similar crude. So when you have a crisis in Venezuela, everyone returns to Canada. And that's why China basically started importing from Canada.

There is new efforts right now by some companies to convince the government to go for another pipeline. It does not seem likely under the current Canadian administration, because it is far on the left. And they are against the fossil fuel industry in general.

Although I don't like this term, but I used it. But the idea here is Canadian crude is extremely important in various ways. At the same time, we are expecting growth in Canadian crude production in the coming years.

Right, okay, so let me come back to maybe roughly where we started earlier. So the question I was posing was that India says that it will obviously increase its dependence on US energy. Now, I don't know how much is oil and gas, because we already import a lot of gas from there.

We don't know at this point what's going to happen to the Russia-Ukraine war. But there seems to be some kind of pressure, including through the secondary tariffs. And to your point, that may actually or eventually have no impact at all.

But if you were to come back to what we're seeing right now in the market, and what or how this is going to play into prices of crude or crude oil prices in the next few months, or let's say until the early part of 2026. What's your projection or outlook?

Yes, I will answer this. I just want to mention the following. India ignored completely the sanctions by the EU and the European countries.

When we talk about the EU and European countries, we are talking about sanctions by the UK and Switzerland, since they are not part of the EU. But the idea here is they ignore them completely. So on daily basis, we see tankers that are sanctioned by the EU, UK, and Switzerland coming to India.

So India ignored that completely. The other issue is, as you know, the EU imposed sanctions on Badena or the Naira refinery in India. And what we've seen in recent weeks is that we are seeing sanctioned tankers going to a sanctioned refinery and delivering the oil anyway.

And as we speak, there are tankers carrying petroleum products from Naira refinery in the Red Sea going towards some other countries. We don't know whether they are going to Europe or some African countries. So the idea here is sanctions are not working.

And there is no way to enforce them. So that's a fact. And what that means is, we are not going to see the sharp increase in prices, since you asked about prices, as a result of additional sanctions.

The additional sanctions will cause confusion in the first few days. Again, the companies and the shippers and everyone else will play the musical chair game. And then everything goes back to normal, in a sense.

The way we see it right now is, whatever you see in the market today, prices in the 60s, low 70s, that's what we see from now until the end of 2026.

Right, and last question, is there anything that can change things? I mean, could there be, not a black swan event, but I mean, anything that you feel that can fundamentally alter either the pricing or the supply, or for that matter, even demand there?

Yes, a couple of things. The most important factor that might change things is the US and China reaching a permanent, conclusive trade deal. This is going to change a lot of things.

And this is bullish for oil, bullish for LNG, and probably bullish for everything. We will see higher economic growth, not only in the US and China, probably in other countries, so that's the primary one. If the war in Ukraine ends, it's not necessarily that sanctions will end.

We might see some relaxation of sanctions, and they are conditional. So what we are going to see, and that's going to change things, is whether the trade direction in oil and LNG will change. Because right now, we have, if you look at the data, and we are going to publish something in the daily energy report related to this.

If you look at the data, we've seen more oil on water, which means that we have more oil tankers on water than before after the sanctions. Because tankers have to go around Africa or take the long route because of it, and also because of the Houthi attacks in the Red Sea. And solving the problems in Gaza and solving the problems in Ukraine will change that direction again.

That's going to lead to two things. That's going to reduce the time the ships arrive to their destination, and it's going to reduce the shipping cost, and it's going to reduce the insurance cost. And if this happened, of course, it should lower prices, but at the same time, it should increase demand, and demand will push prices up in the next phase.

So these are the two major factors that we are looking at next year.

Right, Dr. Al-Hajji, we've run out of time. Thank you so much for joining me from Dallas and sharing your views.

Thank you, thank you very much.

Author:   The Core Team

In this week's The Core Report: The Weekend Edition, Govindraj Ethiraj speaks to Dr. Anas F. Al-Hajji, a renowned energy markets expert, on how low crude stocks and refinery limitations leave India vulnerable to global supply shocks, underscoring the urgent need for strategic energy planning.

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